This blog comes from Colorado firm Higgins, Hopkins, McLain & Roswell. Our goal is to use this blog as a means by which to share news and updates regarding construction litigation in Colorado. While we specialize in litigation of complex construction claims, including construction defect matters, we also use this blog as a platform to share thoughts and ideas regarding risk management strategies that can be implemented to minimize the risk of construction related claims.

Wednesday, January 15, 2014

In an earlier
blog post, we discussed the case of Triple
Crown Observatory Village Assn., Inc. v. Village Homes of Colorado, Inc., et al
(2013 WL 5761028) because it presented the rare case where the Colorado Court
of Appeals accepted an interlocutory appeal. Notably, the interlocutory appeal
resulted from dismissal of the HOA case in which the trial judge directed the
parties to arbitrate in lieu of a jury trial, under the declaration of
covenants, conditions, and restrictions that governed the community. The Court
of Appeals decided the case on its merits on November 7, 2013, and its decision
can be found at 2013 WL 6502659. (Note: this presently unpublished
opinion may be subject to further appeal to the Colorado Supreme Court.)

The case resulted from an attempt by the
HOA’s counsel to amend the mandatory arbitration provisions of the declarations
before it filed suit. This amendment
process took the form of soliciting signature votes of homeowners on a
revocation resolution to repeal the specific provisions of the declarations
that provided mandatory, binding arbitration as the sole remedy for disputes between
the HOA and the developer and/or general contractor. The declarations required
that 67% of homeowners vote in favor of amendment in order to modify the declarations.

After 60 days of soliciting such written
signatures, the HOA was only able to get 48% of homeowners to vote for the
modifications, which was not enough to pass the amendment. However, within another 60 days (120 days
after beginning to obtain signatures), the HOA had the required 67% of
signatures on the amendment resolution.

The questions on
appeal were whether, as argued by the declarant developer and general
contractor, the HOA was governed by the time limits for such a process under the
procedures of the Colorado Revised Non-Profit Corporation Act (CRNCA).
Declarant argued that those procedures only allowed the HOA 60 days to gather
all of the required homeowner signatures, after which time the amendment would
fail if there were insufficient signatures.

In contrast, the
HOA argued that the Colorado Common Interest Ownership Act (CCIOA) was the
relevant governing authority, and that the lack of any stated time limits for
gathering such homeowner signatures for modification of the declarations meant
that the HOA had successfully amended the declarations using a period of more
than 60 days. Accordingly, the HOA
argued that through its actions over 120 days, the arbitration provisions of
the declarations had been repealed. The HOA
then argued that it had a right to a jury trial on its claims against the declarant
developer and general contractor, as well as other related parties.

In a lengthy and
analytical opinion, the Colorado Court of Appeals held that both statutory
authorities were potentially applicable.
However, it determined that there is a provision in CCIOA which makes
that statute the greater and final authority where the two statutes may be in
conflict. However, the appellate court
found that the time limit issues raised by the parties were not addressed to
any degree by CCIOA, and instead that such time limits were addressed by the
provisions of CRNCA.

Because there
were no timing-related conflicts found between the statutes, the court
determined that it had a duty to harmonize the statutes if possible. Since the
time limits for such actions were found in CRNCA, and these requirements were
not expressly or impliedly contradicted by the terms of CCIOA, the Court
determined that the governing authority was the CRNCA. Since that statute provided time limits that
were not met by the HOA, the Court determined that the HOA failed to amend the declarations. Accordingly, the HOA was required to submit
to binding arbitration in lieu of a jury trial, as ordered by the trial court. Significantly,
the Court also held that the HOA’s Colorado Consumer Protection Act (CCPA)
claims were subject to the same arbitration process, and could not be
separately asserted in a jury trial.

The lesson to be
taken from this case is obvious, regardless of whether it is further appealed
to the Colorado Supreme Court. The
application of technical procedures under the CRNCA and CCOIA must be part of
overall case evaluation, and early in the case.
If there are arbitration provisions which arguably govern the dispute,
they must be followed. If those provisions have been amended, the amendment
requirements must also be strictly followed, or the amendments may not be
successful. In the end, that analysis
will decide whether the case proceeds to jury trial or mandatory binding
arbitration.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

Wednesday, January 8, 2014

In
a recent case of first impression, the Colorado Court of Appeals determined
that the economic loss rule does not bar a nondisclosure tort claim against a
seller of a home, built on expansive soils which caused damage to the house
after the sale. The case of In re the Estate of Carol S.
Gattis represents a new decision regarding the economic loss rule. Because it is a case of first impression, we
must wait to see whether the Colorado Supreme Court grants a petition for
certiorari.

Until
then, we will analyze the decision handed down on November 7, 2013. The sellers of the home sold it to an entity
they controlled for the purpose of repairing and reselling the home. Before that purchase, Sellers obtained
engineering reports including discussion of structural problems resulting from
expansive soils. A structural repair
entity, also controlled by Sellers, oversaw the needed repair work. After the repair work was completed, Sellers
obtained title to the residence and listed it for sale.

Sellers
had no direct contact with Gattis, who purchased the residence from Sellers. The purchase was executed through a
standard-form real estate contract, approved by the Colorado Real Estate
Commission: Contract to Buy and Sell Real Estate, to which no changes were
made. Several years after taking title
to the residence, Gattis commenced action, pleading several tort claims
alleging only economic losses based on damage to the residence resulting from
expansive soils.

Sellers
argued, in a pretrial motion for summary judgment, that Gattis’ claims should
be precluded by the economic loss rule.
Sellers also raised the economic loss rules through an oral motion to
dismiss at the end of Gattis’ case-in-chief at trial. The trial court denied all of Sellers’
attempts to invoke the economic loss rule.
Sellers appealed on the basis that the economic loss rule should have
barred Gattis’ tort claims.

Pursuant
to the economic loss rule, “a party suffering only economic loss from the
breach of an express or implied contractual duty may not assert a tort claim
for such a breach absent an independent duty of care under tort law.” Town of Alma v. AZCO Constr., Inc., 10
P.3d 1256, 1264 (Colo. 2000). The source
of the underlying duty determines whether the economic loss rule applies. Id. at 1262. For a claim to escape the economic loss rule,
the duty must arise independently of any contractual obligation. Id. at 1262.

The
trial court held Sellers liable for nondisclosure of material facts. The trial court explained that Sellers falsely
represented in the contract that they had no personal knowledge of the property,
including the presence of expansive soils which already had caused serious
structural damage to the residence. On
appeal, Sellers did not dispute the trial court’s finding that before the sale
closed: no reference was made to “expansive soil;” no person or entity ever
informed Gattis, or Gattis’ representatives, that the Sellers were principals
of the structural repair entity; and, neither Gattis, nor Gattis’
representatives, were ever made aware of the various engineering reports that
Sellers had reviewed when debating their purchase of the residence.

The
Court of Appeals relied on past cases to conclude that an independent duty
exists between home sellers and home buyers, as well as residential builders
and subcontractors. The Gattis
court relied on Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak
Geotechnical, Inc., 2013 WL 3943215, a negligent construction case
involving a residence. In that case,
several policy considerations were identified favoring an independent duty to
protect homeowners: preventing overreaching by builders, who are comparatively
more knowledgeable to determine structural conditions of a house than most
buyers; ordinary purchasers of a home are not qualified to determine when or
where a defect exists; purchasers of homes rarely have access to make any
inspection of the underlying structural work, as distinguished from the merely
cosmetic features; magnitude of the investment made when purchasing a home;
foreseeability that a house will be sold to someone who is not the original
owner; foreseeability that a construction professional’s work on a home is for
the benefit of the homeowners, and that harm to the homeowners from negligent
construction is foreseeable; and, an independent duty discourages misconduct
and provides an incentive for avoiding preventable harm.

The
Gattis court drew analogies between a home builder’s common law duty to
act with ordinary care, as discussed in the Mid Valley case, and a home
seller’s common law duty to disclose known but latent defects in the
property. Both of those duties are long
standing, with the Gattis court pointing out that for over 50 years
Colorado has required sellers to disclose latent soil defects of which they are
aware. Another analogy was drawn between
a builder’s position of superior knowledge related to the structural condition
of a home and a seller who has actual knowledge of a latent defect. The Gattis court then stated that
where a disparate knowledge exists, a person has a duty to disclose to another
with whom he deals facts that in equity or good conscience should be
disclosed. In contrast, where an
original homeowner or a later buyer, both parties have a similar difficulty in
learning of a latent defect.

Furthermore,
according to the Gattis court, a buyer cannot not afford to suddenly
find a latent defect in his or her home, whether it is caused by a negligent
home builder or a seller who remains silent despite knowledge of a latent
defect. Typically, this is because a
home purchase is the biggest purchase and most important investment, and done
on a limited budget. Such harm to the
home and homeowner are also equally foreseeable, whether caused by a latent
defect arising from negligent construction or nondisclosure of any latent
defect known by the seller.

The
final analogy the Gattis court drew between the home builder’s common
law duty to act with ordinary care and a home seller’s common law duty to
disclose known but latent defects in the property, relates to enforcing the
duty of the sellers to disclose the known latent defects. Just as enforcing the duty to build with
ordinary care avoids preventable harm to innocent parties, the Gattis
court concludes so will enforcing the duty of the sellers to disclose the known
latent defects. Limiting its holding
somewhat, the Gattis court did state that the burden to disclose latent
but known defects is minor because the seller’s duty to disclose latent but
known defects would only apply to material defects.

We
have to wait and see if Gattis will be upheld by the Colorado Supreme
Court. But until then, Colorado home
sellers have a new independent tort duty for disclosure of latent but known
defects.

For additional information regarding Colorado
construction litigation, please contact David M. McLain at (303) 987-9813 or by
e-mail at mclain@hhmrlaw.com.

Friday, January 3, 2014

Workers’
compensation (“WC”) costs are a significant portion of the labor costs
experienced by construction companies.
These costs have typically risen over time due to the “experience
modification factor.” This term means the amortized cost of past claims
recovered through future premiums charged by an insurer to an employer. As a
company’s claims go up in both number of claims and total expense of claims
over time, the experience modifier increases as a multiplier of the base WC
premium. As with other general medical
costs, the question is not whether the cost of claims with a medical component
will go up, but rather the rate at which they will increase from year to year.

It
is with these facts of life in mind that it is reported that the Colorado
legislature will take up a bill concerning WC benefits in the 2014 session.
This bill, if passed, will have the likely effect of dramatically increasing
the cost of WC claims to the construction industry - along with all
other Colorado employers.

The
draft bill has three distinct changes for the current law, each of which serves
to change the delicate balance of rights and obligations of employers and
employees under existing law.

1.The Changed Choice
of WC Primary Physician

The
first change allows the injured employee to select his own attending primary
doctor for the first three days after the injury occurs. Existing law gives this right of appointing
the primary physician to the employer, and it is a key to (1) getting
appropriate, cost-conscious care to the employee; (2) getting the employee
released to light duty and/or the earliest reasonable physician-approved return
to regular work; and (3) getting the doctor’s reasonable determination of when
the employee has reached “maximum medical improvement,” after which medical
care either ceases, or tapers to a lesser degree of “maintenance care.” In
other words, it is as important to an employer to have a middle-of-the road
physician to serve as the medical “umpire” of what is reasonable for the
nature, extent, and duration of WC medical care.

This
proposed change would alter the present procedures, and allow the employee to
select a Level II accredited WC physician of the employee’s choosing within
three days of the accident/injury. Note: Level II accreditation is not
significantly less difficult to obtain than a driver’s license. It involves limited and brief attendance of
classes held on weekends, and successful completion of a multiple-choice
examination on WC procedures and benefits.

Interestingly,
or coincidentally, the present law also gives the employee up to three days to
report the accident/injury to the employer.
Practically speaking, this means that the employee has two and a half
days not to report the accident/injury, but within which to find a lawyer who
will typically direct the employee to a doctor who is generously claimant-oriented.
Then, both the accident and the chosen doctor will be made known to the
employer by the end of the third day. If
the accident/injury was not witnessed and understood for what it was (which is
surprisingly often the case), the employer may not know that there is a WC
situation brewing.

Odds
are that the claimant-chosen physician may be significantly less of an honest
broker when it comes to (1) making decisions about referrals to other medical
providers for additional care; (2) deciding work restrictions during recovery
from the injury; (3) allowing the employee to return to regular duty; (4)
deciding when “maximum medical improvement” has been reached; and (5)
determining the nature of future care and disability benefits. These are the key decisions that drive claim costs,
claim duration, and overall WC benefits to the employee – which will return as
later premium costs to the employer.
Clearly, the proposed change which would allow the employee to make the
key cost-driving decisions at the front of the WC claim.

2.The 50% Increase
in Benefits if the Injury Was Due to an “Unsafe Workplace”

3.

The
second proposed legislative change involves the right of the employee to claim
a 50% increase in the statutory WC benefits if the employer “willfully placed
the employee in an unsafe work environment.”
Little needs to be said about the vagueness of this new provision which
appears to lack any objective standards.

More
importantly, this potential change would create an opportunity for claimants to
increase their benefits by 50%, if the Administrative Law Judge (ALJ) who
decides the case as a sole fact-finder decides that the facts of any particular
case meet this nebulous and potentially subjective standard. Bluntly stated, it is designed to create new,
ancillary claims for a 50% increase in WC benefits in exchange for merely asking
for a hearing on the matter before an ALJ.

The
proposed change in override benefit liability is akin to an injured worker being
given a lottery ticket at the time of the injury. Most importantly, it is
philosophically contrary to the 100-year historical legislative policy that the
Colorado WC system was created as a no-fault area of the law, with benefits
being awarded solely on the basis of the injury, not the causal fault of the
employee or the employer.

Notably,
ALJ fact-finding is generally not subject to any meaningful appeal. Once an ALJ
decides the facts of the case, they are presumptively written in stone.

Once
again, these new 50% override benefit exposures will be translated (even
prospectively and pre-emptively) into steeply climbing premium costs. This is
particularly likely in construction environments, where safety can be
inherently difficult to control during multi-trade activity.

3.The Change in
“At Will” Employment for WC Claimant Employees

The
third change proposed by next year’s draft bill is that a WC claimant’s
resignation of current employment may only be “voluntary,” rather than decided
by the employer in the present Colorado “at will” employment environment. While this leaves open the possibility that
the employment resignation of the WC claimant will be “negotiated” by the
parties for an exchange of dollars, it gives the WC claimant employee an
effective right of veto over the employer’s decision to terminate that
employment. In a worst case scenario, this
means that a WC-injured employee who cannot do the job that they were doing
before the injury is potentially an employee for life of the WC employer by
statute. In the hypothetical alternative,
the employer can make the employee an offer of settlement that is so lucrative
that it is an “offer that cannot be refused.”

The
practical and legal problem for employers is that insurers will potentially say
that this termination prohibition is a non-insured employment law issue, rather
than a covered WC insurance issue. The potential result may be that such
settlements will not be paid – or will be only partially paid – by the WC
insurer, if at all. The uninsured “resignation” balance will potentially need
to be paid by the employer without the benefit of WC insurance. The alternative is that no resignation is
ever negotiated, and the disabled employee must be continued on the payroll.
This scenario assumes that the employee may be paid a pre-injury salary or wage
that is not driven by the (diminished) ongoing value of the employee’s work for
the employer.

4.Action and
Communication are Needed – NOW

These
proposed legislative alterations in the present fabric of WC law and employment
law are problematic to say the least. That they will dramatically raise
employer costs – with significant impact on construction costs, in particular,
is not debatable. In fact, this assessment
is probably superficial in identifying the mischief that will be done with such
changes.

If
action is to be taken to avoid these developments, it should be taken now. Contacting your state senator and representative
is an important means to this end.
Testifying before the committee with responsibility for the bill is
equally important. Talking to your
colleagues and even your competitors in the world of construction – now – has seldom
been this important.

For additional information regarding Colorado construction litigation,
please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

Disclaimer

The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.

About the Firm

Higgins, Hopkins, McLain & Roswell exists to embody and exemplify the principles of service and stewardship. In everything we do, we focus on serving our clients selflessly and to the best of our ability. In doing so, we always have in the forefront of our minds our obligation to act as the stewards of our clients’ trust, confidences, and resources. We are highly regarded for our expertise in construction law and the litigation of construction claims. We represent a wide variety of clients, from individuals, to small businesses, to Fortune 500 companies.